Keynes reads The Road to Serfdom

By the early 1940s, the Keynesian
Revolution in America was in full swing. Fast-moving events in Germany obliged
Franklin D. Roosevelt to spend on the vast scale that John Maynard Keynes
prescribed. Despite the president’s assurances during the 1940 presidential
campaign -- “I have said this before, but I shall say it again and again and
again: Your boys are not going to be sent into foreign wars” -- he ordered a
gargantuan rearmament program. In 1940, the annual defense expenditure was $2.2
billion; the following year it reached a sizzling $13.7 billion.

“If expenditure on armaments really does
cure unemployment, a grand experiment has begun,” Keynes declared in 1939. “We
may learn a trick or two which will come in useful when the day of peace
comes.”

The multiplier effect of so much public
money being pumped into the American economy caused gross domestic product to
jump by about $25 billion, with arms and other defense spending accounting for
46 percent of the increase. Even so, employment wasn’t restored to the
pre-Roosevelt recession level until 1941, the year America was attacked by the
Japanese at Pearl Harbor. “We saw the war as a justification of the Keynesian
theory, the Keynesian doctrine, and the Keynesian recommendation,” John Kenneth
Galbraith recalled.

Pessimistic Masterwork

Friedrich Hayek, meanwhile, set out on his
pessimistic masterwork, “The Road to Serfdom.” As his biographer Alan Ebenstein
observed, the book revolutionized Hayek’s life. Before its publication, he was
an unknown professor of economics. A year after it was published, he was famous
around the world. Not bad for a book that Hayek, with rare modesty, believed
only a few hundred would read.

The principal targets of “The Road to
Serfdom” are what Hayek deemed the twin evils of socialism and fascism, though
he felt obliged to soften his criticisms of communism and allude more to the
dangers of Nazism because at the time of writing Josef Stalin’s Soviet Union
was allied to Britain and America. He said the common perception that the
extremes of Left and Right were polar opposites was a misapprehension because
both -- by replacing market forces with state planning -- assaulted individual
liberties. He reiterated his belief that as economic planners can’t know the
will of others, they end up acting like despots.

Preconditions for Totalitarianism

Hayek feared that when World War II was
won, the Allied victors might conclude that wartime economic management would
speed a more prosperous, more just postwar society. Such policies, he warned,
invited the preconditions for totalitarianism and might cause history to repeat
itself.

“We have progressively abandoned that
freedom in economic affairs without which personal and political freedom has
never existed in the past,” he wrote. “It is Germany whose fate we are in some
danger of repeating.”

Classical economists and conservatives
don’t fare much better than socialists and communists in Hayek’s stark
analysis. He condemns the “wooden” advocates of free-market solutions, while
rejecting conservatism, a devotion to existing institutions. “Though a
necessary element in any stable society, [conservatism] is not a social
program,” he wrote. “In its paternalistic, nationalistic and power-adoring
tendencies, it is often closer to socialism than true liberalism; and with its
traditionalistic, anti-intellectual, and often mystical propensities it will
never . . . appeal to the young and all those others who believe that some
changes are desirable if this world is to become a better place.”

Coincidence

By coincidence, Keynes read “The Road to
Serfdom” in June 1944, while he was sailing across the Atlantic en route to
Bretton Woods in New Hampshire to preside over the negotiations for the
international currency mechanism that took the hotel’s name. Plainly relaxed
after his sea crossing, Keynes dropped a line to his old rival from the
Claridge Hotel in Atlantic City, New Jersey.

“The voyage has given me the chance to read
your book properly,” he wrote. “In my opinion it is a grand book. We all have
the greatest reason to be grateful to you for saying so well what needs so much
to be said. You will not expect me to accept quite all the economic dicta in
it. But morally and philosophically I find myself in agreement with virtually
the whole of it; and not only in agreement with it, but in a deeply moved
agreement.”

Role for Planning

Hayek conceded in “The Road to Serfdom”
that in the case of tackling chronic unemployment, planning might play its part
and that the right form of planning might not lead to oppression. As he later
expressed it, “So far as government plans for competition or steps in where
competition cannot possibly do the job, there is no objection.” He also
believed that the state may have a moral duty to step in and that was
admissible so long as the spirit of free enterprise was not compromised.

“There can be no doubt that some minimum of
food, shelter, and clothing, sufficient to preserve health and the capacity to
work, can be assured to everybody,” he wrote. “Where, as in the case of
sickness and accident, neither the desire to avoid such calamities nor the
efforts to overcome their consequences are as a rule weakened by the provision
of assistance -- where, in short, we deal with genuinely insurable risks -- the
case for the state’s helping to organize a comprehensive system of social
insurance is very strong.”